What were the unexpected initiatives?

The 2010 Budget delivered some unexpected initiatives for entrepreneurs. The doubling of the Annual Investment Allowance will allow businesses to claim immediate tax relief of up to £100,000 each year for capital assets (excluding cars) purchased from April 2010. This will mean an additional saving of £10,500 for companies and up to £25,000 for unincorporated businesses. In a further concession, businesses that purchase new zero-emission goods vehicles from between April 2010 and April 2015 will benefit from a 100 per cent first year allowance.

The Chancellor highlighted the need to support the industries of the future. This regime should introduce a new 10 per cent corporate tax rate from April 2013 on income from patents registered in the UK. The video games industry will also receive a special tax relief following recommendations of the Digital Britain report.
A new Small Business Credit Adjudicator with statutory powers will review applications for finance that have been declined.

The government also introduced the housing of its £4bn suite of finance products for small and medium-sized businesses under one roof, which is now known as UK Finance for Growth. This aims to streamline the various initiatives previously announced. The fund will support businesses that need £2m- £10m in financing and are struggling to access capital through traditional routes.

A new Small Business Credit Adjudicator with statutory powers will review applications for finance that have been declined. Finally, there was a commitment to allow early stage businesses to get a larger slice of government expenditure by mandating a 15 per cent increase in the central government spending allocated to small and medium-sized enterprises – an estimated increase of £3bn.

The Business Payments Support Scheme which has been utilised by 200,000 businesses to date is now extended for a further five years.

On the investment side, the lifetime limit on Entrepreneur’s Relief – the rate at which capital gains tax is limited to 10 per cent – was doubled to £2m, providing a further £80,000 of relief (total £160,000) for entrepreneurs who meet the conditions. Despite speculation, the main rate of capital gains tax will not increase from its current level of 18 per cent.

The territorial rules contained within the Enterprise Investment Scheme, the Venture Capital Trust regime and the Enterprise Management Investment scheme has been relaxed. Previously, qualifying activities were to be ‘wholly or principally’ in the UK. Now a ‘permanent establishment’ in the UK will suffice.

Finally, there were a number of measures announced to combat tax avoidance and evasion, including higher penalties and even more disclosures. This follows the announcements made in the 2009 Budget Report about the new 50 per cent top rate of income tax and the 1 per cent increase (for employees and employers) in national insurance and the new pension restrictions.

You and your finances

Some major tax changes come into affect from 6 April 2010 that had been announced in previous Budgets. From April 6, there is a new higher rate of income tax set at 50 per cent on earnings above £150,000. In addition income tax allowances and bands will be frozen – meaning that everyone will pay more tax on their earnings if they receive a pay rise.

Following Budget 2010 we have provided answers to some of the most asked questions we’ve received from clients.

Q: I’m a first time buyer – what help was announced to help me get on to the property ladder?
A: For two years commencing from 25 March 2010 stamp duty has been scrapped on home purchases made by first-time buyers on properties worth up to £250,000. Couples buying homes jointly where one partner has previously bought a property will not be eligible even if the other partner is a first-time buyer.

Q: We’re currently looking to sell our house valued at £1.4m – how will Budget 2010 impact on the sale?
A: If you are able to sell your house before 5 April 2011, you will not be subject to the stamp duty increase announced, however after this date the stamp duty rate payable on a property purchase of more than £1 million will increase from 4 per cent to 5 per cent.

Q: Following Budget 2010 – will we need to review our current inheritance tax planning provisions?
A: The pledge to increase the inheritance tax threshold (IHT) to £350,000 will now not take place – the Chancellor announced he was freezing the current threshold of £325,000 for the next four years. The freezing of the IHT band for a further four years could cost a couple an additional £37,000 in IHT in real terms. If the value of your estate increases further and falls outside of your current IHT provisions, it makes sense to seek professional advice and review your particular situation, especially if the value of your estate increases considerably over the next four years. Freezing the IHT threshold for another four years will mean more families may need to consider estate planning opportunities by maximising reliefs and exemptions.

Q: I’m an entrepreneur and plan to sell my business within the next year – how will Budget 2010 affect me?
A: The Chancellor confirmed that the rate of capital gains tax (CGT) will remain at 18 per cent. However, the annual amount of gains exempt from the tax is to be frozen at £10,100. The good news is that for entrepreneurs from April 2010, your will only have to pay 10 per cent on the first £2 million of capital gains. Depending on the value of your business, this could save you up to £80,000 when you sell.

Q: I’m a small business owner – were there any good news announcements in Budget 2010 for me?
A: At the centre of this Budget was a £2.5bn package for small and medium – sized businesses. Business rates will be cut for a year from October and the investment allowance for small firms will be doubled to £100,000. Measures announced for small businesses aimed at assisting cash flow, included the extension of HMRC’s ‘Time to pay’ scheme. This scheme supports companies in distress struggling to pay their tax bills. The Chancellor has also ordered state-funded banks RBS and Lloyds TSB to provide £94 billion in small business loans, and he has created a new credit adjudication service for business owners who feel they have been unfairly rejected for credit.

Q: I earn £50,000 – how will my income be affected by Budget 2010?
A: As previously announced, the Chancellor has decided to freeze all income tax bands, which will lead people to pay more tax on their earnings. There will be a 0.5 per cent increase in National Insurance contributions from 6 April 2011. The threshold at which you start paying tax at 40 per cent will remain at £43,875 for the 2010/11 tax year. This could mean you end up paying an extra £1,248 a year based on a £50,000 annual salary. The top rate of tax for people earning more than £150,000 is 50 per cent, up from 40 per cent, commencing 6 April 2010.

Q: I’m aged 42 and want to take out an Individual savings Account (ISA) – is it correct that I will be able to save a higher amount?
A: The Chancellor had already announced that the total ISA limit for everyone would increase to £10,200 from 6 April 2010. Depending on your attitude towards risk for return, on or after this date you could put all of your money into a stocks and shares ISA, or alternatively put up to £5,100 (previously £3,600) into a cash ISA, with the remainder available for stocks and shares. The Chancellor also announced that from 6 April 2011, the ISA limits would increase in line with inflation for every year of the next parliament. The level of the increase will be set by the level of the Retail Price Index (RPI) the preceding September.

Q: I currently receive pension tax relief – following Budget 2010 will it be limited?
A: It really depends on your level of income. If you earn over £130,000, the Chancellor confirmed that tax relief on pension contributions will be restricted from 6 April 2011. If your pre-tax income (including your own pension contributions) is less than £130,000 you will not be affected. Previously, up to 100 per cent of an employees’ salary could be paid into a pension tax-free. In an extensive report on the proposed changes, the government said: ‘It is neither fair nor sustainable in the current fiscal context to offer the greatest incentive to save in a pension to those who need it least. ‘For these reasons, the government has acted to address the disproportionate levels of relief going to individuals on the highest incomes’. The rate of relief will be tapered down so that those on incomes of £180,000 and over will receive relief at 20 per cent, the same rate as a basic-rate taxpayer.

Q: We are over 80 – what did Budget 2010 mean for us?
A: Last year’s temporary increase to the winter fuel allowance was renewed for another year. This means each household with someone over the female state pension age will receive £250, and each household with someone over the age of 80 will receive £400. The Chancellor is also making it easier for over 60s to claim working tax credit by cutting the number of working hours needed to qualify.

In brief

The savings industry has given a mixed reaction to news announced in Budget 2010 that from April next year Individual Savings Account (ISA) limits will automatically increase in line with inflation.

Since October last year savers aged over 50 have been able to put up to £10,200 a year in the tax-free savings wrapper, £5,100 of which can be held in cash, and, as announced in last year’s Budget, this will come into effect for everybody from 5 April this year.

From 6 April 2010 the annual ISA is £10,200. Investors can put all of this money into a stocks and shares ISA. Alternatively they can put up to £5,100 (previously £3,600) into a cash ISA, with the remainder available for stocks and shares.

The main rate of capital gains tax (CGT) remained unchanged at 18 per cent. However, the CGT exemption allowance is being frozen at £10,100 for 2010/11. In addition, the Chancellor said that he was doubling the level of Entrepreneurs’ Relief from £1 to £2 million.

Entrepreneurs’ Relief allows those selling businesses they started up to have up to £1 million of gains over a lifetime taxed at a lower rate of 10 per cent.

The Chancellor announced he was freezing the threshold for inheritance tax (IHT) at £325,000 for another four years.

New measures announced

The widely utilised area of loans written off by close companies for the purpose of obtaining a corporation tax deduction for a dividend is being closed following new measures announced in Budget 2010.

Prior to the Budget announcement, where a close company (under the control of five or fewer individuals) makes a loan to a ‘participator’ (very broadly a shareholder) or to an associate of a participator, and subsequently releases or writes off that loan, under the loan relationship provisions the company may be entitled to a corporation tax deduction on the amount released or written off. In the hands of the participator the release is taxed in the same way as a dividend.

These rules broadly provide that the taxable and relievable credits and debits brought into account arising to a company under its loan relationships are those arising under generally accepted accounting practice (GAAP). A loan released or written off will normally give rise to an expense recognised in the company’s accounts under GAAP.

The new rules, which will be introduced in the Finance Bill 2010, will prohibit any deduction being brought in by the company for loan relationship purposes if the loan is wholly or partly released or written off. The income tax treatment of the person to whom the loan was made is unaffected by the measure.

Threshold frozen for a further four years

The inheritance tax (IHT) threshold has been frozen for a further four years at £325,000, rather than rising in line with inflation. This could mean that more households are caught by this tax. In addition, the amount collected from estates that pay these “death duties” will inevitably increase, as a greater proportion of estates are likely to become subject to this charge.

Prior to Budget 2010 many people had expected this allowance to rise in line with the higher values of suburban houses that are in the ownership of many elderly people. This announcement will mean that many more people could fall into the IHT net in the next few years. The value of any estate over the nil-rate band
value of £325,000 is charged at 40 per cent.

Over the past 10 years this “nil-rate band”, along with other tax allowances has risen in line with inflation. The Chancellor has frozen a number of tax allowances for the this year, and announced the inheritance tax threshold will remain static for the life of the next parliament in order to raise funds to help meet social care costs.

The Chancellor had previously made concessions on this tax. Since November 2007, married couples have been able to transfer this allowance, effectively allowing them to pass on assets worth £650,000 to their children (or other beneficiaries) before any IHT is due.

But the Chancellor signalled that he will be clamping down on complex tax avoidance schemes, used by many wealthier families to minimise future IHT bills. In his Budget 2010 speech he indicated that for the first time IHT schemes will soon fall under the Disclosure of Tax Avoidance Scheme rules, which previously have only covered income tax, corporation tax and capital gains tax.

A boost for first-time home buyers

For the next two years, first-time homebuyers will be able to buy properties worth up to 250,000 pounds without paying stamp duty, the Chancellor, Alistair Darling announced during his Budget 2010 speech.

“I can announce I will double the stamp duty limit for first time buyers from midnight tonight for this year and next,” the Chancellor told parliament. “This means 9 in 10 first-time buyers will pay no stamp duty at all.”

The Chancellor said the relief would be funded through an increase in stamp duty to 5 per cent on residential property selling for over one million pounds, but not until April 2011.

New Stamp Duty Property Rules
Property value up to £125,000 zero (up to £250,000 at zero for first-time buyers)
£125,001 to £250,000 1 per cent
£250,001 to £500,000 3 per cent
£500,001 to £1,000,000 4 per cent
Over £1,000,000 5 per cent (from April 2011)

The highlights at a glance

At the centre of Budget 2010 is the £2.5bn package for small and medium – sized businesses. The Chancellor used this Budget to announce a number of new measures intending to improve the cash flow situation of SMEs, but many won’t actually come into force until next year.

The Chancellor’s speech addressed the issues facing SMEs recognising the value they contribute to the UK economy. The main bank lenders into the SME sector (RBS and Lloyds) have been mandated to lend £94 billion to struggling small businesses.
Other government support was offered in the form of a new venture capital fund with £200 million committed to providing additional capital to SMEs and he also introduced some specific tax measures to help with cash flow with the extension of the ‘Time to pay’ scheme, throughout the life of the next parliament.

Business highlights

RBS and Lloyds must provide £94 billion in new business loans, half of which must be provided to small to medium-sized businesses.

A credit adjudicator service to be set up to help SMEs to deal with complaints and examine lending decisions to determine whether they are fair.

The government will set UK Finance for Growth to help to expand the financial sector. The FSA to speed up the licensing process for new banks.

Commitment to G20-approved levy on banks.

Business rates will be cut for one year from October.

The computer games sector in Britain will receive investment. Will also set up a £35 million University Enterprise Capital Fund.

To introduce a 50p tax on landlines to fund superfast broadband rollout for 90 per cent of the country by 2017.

To double the annual investment allowance to £100,000. The main rate of capital gains tax will not increase.

Entrepreneurs’ relief for capital gains tax to be increased to £2 million.

15 per cent more of government contracts will go to small to medium-sized businesses, many of which count the central government as one of their key clients.

The ‘Time to Pay’ scheme for tax payments from SMEs will be extended for the whole of the next parliament.

Pledges that the government will pay 80 per cent of invoices from small business within five days.

Were you a winner or a loser?

Take a look at our guide and see how your finances may have been affected by Budget 2010.

Budget 2010 highlights

Economy
– Net government borrowing estimate this year will fall from the £178 billion target by
£11 billion this year, to £167 billion or 11.8 per cent of GDP.
– Borrowing will fall to £163 billion next year, which is equal to 11.1 per cent of GDP. It will then fall to £131 billion in 2011/12, or 8.5 per cent of GDP. Borrowing will then decline to £110 billion, or 6.8 per cent of GDP, to £89 billion in 2013/14, equal to 5.2 per cent of GDP and to £74 billion in 2014/15 at 4 per cent of GDP.
– Growth forecast for 2011 revised down to between 3 per cent and 3.5 per cent. Predicted growth of 1.0 – 1.5 per cent in 2010 in line with forecasts.
– Net debt as a share of GDP will reach 54 per cent this year. It will then increase to 75 per cent by the end of the forecast period in 2014/15 and will then begin to fall.

Jobs and education
– The number of civil servants in London is to be reduced by one third over the long term, with 15,000 posts relocated within the next five years to help to save £11 billion. One thousand civil servants in the Ministry of Justice will be moved out of London, saving £41 million.
– Consultation on reform of employers’ right to make people retire at 65, which examines options including scrapping the default retirement age, raising it or giving employees stronger rights.
– Guarantee to provide a job or training to 18 to 24-year-olds out of work for more than six months will run until March 2012, instead of ending in March 2011.
– Government to set up a £35 million University Enterprise Capital Fund to support “innovation and spin-out companies”.
– To make available £270 million in 2010/11 to fund an extra 20,000 university places in areas such as science, technology, engineering and maths as part of a University Modernisation Fund.
– The £2.5 billion cost of training young people and extra university places will be partly funded from the tax on bankers’ bonuses.

Housing
– A new stamp duty holiday introduced for properties of up to £250,000, from 25 April 2010, to be funded through an increase in stamp duty from 4 per cent to 5 per cent on properties worth £1 million or more from April next year.
– From October 2011, the most expensive properties across the country will be excluded from the Housing Benefit calculation in each area to save £250 million a year.
Family finances and pensions
– One million people will be provided with bank accounts over the next five years.
– Higher winter fuel payment will be guaranteed for another year, to be paid by closing tax loopholes.
– Inheritance tax threshold will be frozen for four years.
– Extension of the tax credit system for people aged over 60. People will have to work less minimum hours to qualify for tax credits.
– Parents of one and two-year-olds to receive £4-a-week increase in child tax credit from 2012.

Environment
– Government to set up a new green investment bank, which will control £2 billion of equity, to fund a low-carbon economy. Half the cost will come from asset sales, including the Channel Tunnel Rail Link, with the rest matched by private investment.
– To provide an extra £60 million to fund offshore wind farms.

Taxes
– 2.5p rise in fuel duty to be staggered. Will increase by 1p in April, 1p in October with the remainder in January, at which point the government expects inflation to be in line with the Bank of England’s target of 2 per cent.
– Confirmation that the 50 per cent rate of income tax will commence in April for people earning more than £150,000.
– To continue the drive to prevent tax evasion and avoidance. Will sign tax information agreements with Dominica, Grenada and Belize.
– Duty on cider will rise 10 per cent above inflation.
– Duty on alcohol and tobacco will rise by 1 per cent above inflation, then 2 per cent above inflation for two years from 2013.
-Tobacco duty will increase by 1 per cent above inflation and by 2 per cent each year until 2014.
-Confirmed 0.5 per cent increase in National Insurance for people earning more than £20,000, which will come into effect from April next year.

Public finances
– Public sector pay rises will be held at 1 per cent for two years from 2011.
– Budget plans will raise an extra £19 billion to reduce borrowing.
– The government will provide £100 million to repair roads and a further £285 million to fix motorways.
– The government will go ahead with plans to sell the Tote as part of plans to pull in £16 billion from asset sales.
– Government finalising options on the sale of the Dartford Crossing.
– An extra £4 billion will be used to fund operations in Afghanistan.

Restricting higher rate relief

The government issued on 24 March 2010 a summary of the responses to last December’s consultation document on how to implement the restriction of higher rate relief on the pension savings of high income individuals from 6 April 2011. The summary outlines what they have decided on each of the points under discussion and what the next steps in the process are going to be.

Where the restrictions apply, higher rate relief will be reduced by 1 per cent for each additional £1,000 of income between £150,000 and £180,000, so that at incomes of £180,000 and above relief will be restricted to the basic rate. This will work by imposing a tax charge to recover the excess higher rate relief that the individual will claim through their tax return as normal.

The value of an employer’s contribution to a defined benefit scheme will be determined using age-related factors which will take into account both the age of the individual and their normal retirement age under their pension scheme. This will result in a significantly higher deemed value for older scheme members compared with younger members. Members taking early retirement could be particularly affected. The factors will be reviewed at least every five years.

The government will consider the options for recognising ‘negative’ deemed contributions to a defined benefit scheme, for example, where the deemed employer contribution is valued at less than the amount actually contributed by the employee.

These measures could affect employees with a salary substantially less than £150,000 who receive exceptional payments, for example termination payments. However, only the first £30,000 of any redundancy payments will be excluded from the income test. Respondents to the consultation suggested the exclusion should be much higher.

The charges will apply in the year in which pension benefits are drawn by using the income of the previous year, although there will be an exemption where the member retires through serious ill health or dies.

The tax relief restriction will apply equally to high income members of overseas schemes that benefit from UK tax relief, although it is recognised that some members may have difficulty meeting the self-assessment deadline for reporting any charge payable by them, and further consultation will take place on this point.

There will be an obligation on employers, in conjunction with pension scheme administrators, to provide information to employees to enable them to be able to self assess their position. Further discussion will take place on this.

Where an individual’s recovery charge exceeds £15,000 they can spread the payment (plus interest) over three years if their pension scheme is not able to pay it on their behalf.

From 6 April 2011 the special annual allowance will have no further relevance, and normal ongoing regular pension savings will no longer be protected. High income individuals will be affected whose annual taxable income is at least £150,000 before deducting personal pension contributions and payments to charity, but including any employer pension contributions made on their behalf. Individuals whose income on this basis is less than £130,000, ignoring any employer pension contributions, are not affected.

The economy and public finances

The Treasury kept its forecast for growth in 2010 unchanged from the Pre-Budget Report 2009 (PBR) in December at 1.0 -1.5 per cent. However, the forecast for 2011 was reduced slightly from 3.25 – 3.75 per cent to 3 – 3.5 per cent. This moves the Treasury forecast for 2011 closer to that of the Bank of England, but still leaves it well above the average independent forecast for that year of 2.1 per cent.

The Treasury’s medium term economic forecasts remain unchanged at around 3.25 – 3.75 per cent on average for 2012 to 2014.

Public sector net borrowing forecasts were revised downwards relative to the PBR, although the level of borrowing remains high in absolute terms. The previous expectation of £177.6 billion borrowing in 2009/10 (12.6 per cent of GDP) has been reduced to £166.5 billion (11.8 per cent of GDP), while the PBR forecast of a £176 billion deficit in 2010/11 (12 per cent of GDP) has been reduced to £163 billion (11.1 per cent of GDP).